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Dear readers, as per our recommendation on 10th of this month, FX option portfolio comprised of DCS (debit call spread) must have been functioning as desired.
Please refer the below weblink for more reading on our previous write up:
Well, for now existing traders can go long in long USD against KRW, holding long in 3m forwards of USDKRW in conjunction with selling a 3m OTM call (around 1225) is appealing given significant skew in the vol smile.
Long USD against a basket of the expected worst performers by region offers low negative carry (1.5% over six months) and provides some diversification benefits to guard against idiosyncratic country events.
All three countries will be hurt by slowing Chinese demand; Korea is particularly vulnerable due to high export exposure,
The KRW is expected to be the worst performing currency in the EM complex due to trade linkages with China, low yield, and good liquidity, and persistent market expectations of BoK easing.
Selling the upside strike lowers the entry point of being long USDKRW the trade by 1.5%.
If both the spot and option positions are held to expiry, the option position does not entail any risk if USDKRW rises (selling the upside call limits the gain on the trade but any losses are offset by P&L on the spot position) and the risk is unlimited if USDKRW spot declines.
